July 2022 Thoughts and Insights

Michelle Trouvé |

Not surprisingly, very little about the economic environment has changed since our mid-quarter update in May. Inflation and recession continue to be at the forefront of our investment focus.

Inflation: How Long Will It Last?

The chart below helps us illustrate our inflation history and predictions. The black bars show actual reported inflation by quarter since 2019 and the blue and orange bars show the estimates for the next year from two different sources.

From this chart, we can see that inflation had been rising and is most likely now peaking. The problem, however, is that the estimates for inflation (blue and orange bars) are still significantly higher than recent times. So, the good news is that inflation should not get worse, but the bad news is inflation will be around for a while longer. This higher inflation makes it harder for companies to make profits as their input and wage costs are much higher, ultimately resulting in a slowdown of real economic growth.

Recession Looming

With inflation high, growth slowing, and the Fed raising interest rates, an economic recession is likely on the horizon. Retail sales are slowing, consumer services are slowing, new manufacturing orders are down, home sales are slowing, consumer confidence is at an all-time low, and small business optimism is also at an all-time low, just to name a few recent data points.

Our Investment Actions and Plan

As a reminder, we have been positioned for an economic downturn since December 2021 and our plan to remain defensive in our investment selection has been on point. In May, we further reduced our equity positions by selling more Technology (IYW), Broad Market Index (SCHB), and International Developed Market Index (SCHY). We also decided to offset some of the gains taken above by liquidating our Cannabis ETF (MSOS) as the Democratic Congress is unlikely to pass any federal legalization. For our fixed income holdings, we sold Emerging Market Bonds (EMB).

We used a portion of the cash proceeds to buy an interest-bearing short-term US Treasury ETF (SHV) so our cash is earning some interest as we await buying opportunities. We started a small position in Chinese equities (KBA) as the Chinese economy is growing post Covid lockdowns and their government is stimulating by lowering interest rates.

2022 has been difficult for all assets. Unfortunately, even with our defensively positioned investments, our portfolios are currently down. Bear markets are painful, but nonetheless our strategy is outperforming on a relative basis. Below are charts showing both the returns for broad asset categories as well as individual sectors for the year. As a reminder, we own Utilities, Consumer Staples, and Healthcare. In 2021 and early 2022, we sold and took profits in Consumer Discretionary, Industrials, Financials, Energy and Materials.

We will continue to hold minimum core positions in Technology and our Broad Market funds as bear market rallies can be extremely swift to the upside and we would not want to lose the opportunity to participate in an early recovery.

Our plan remains to look for opportunities to re-invest at lower prices as we are confident that we have the signals and tools to recognize when the time is right. We will continue our goal to preserve and protect, and we look forward to the day we can focus again on growing our hard-earned wealth.

We are grateful for your trust in us managing your investments. We are dedicated to serving you and, as always, welcome any questions you may have.